My own view is that a switch to deductibility would increases pressure on capital importing countries to reduce their source-based taxes (a deduction does not fully offset the foreign tax, so it would make such taxes more costly to US firms as compared to fully creditable foreign taxes), and therefore transfer revenues from poor to rich countries. Deferral already places tremendous tax competition pressure on host countries, while ending it might enable some countries (to which US capital is a major source of inbound investment) to increase their source-based taxation (as explained in this paper). Therefore I was happy to see this FP&S paper give additional support to the beleaguered tax credit while still recognizing that there is such a thing as giving too much credit.
I was also intrigued to see FP&S begin their paper by picking up Reuven Avi-Yonah's premise that taxation on the basis of residence and source is customary international law. That is not only a relatively unusual argument to find in a US-authorized tax paper, but it is a potentially controversial perspective, which I am exploring in a paper of my own (making the international law case against citizenship based taxation). So, thank you Fleming, Peroni and Shay, for the additional citation support for my arguments.
It is also worth noting that FP&S include in this paper a defense of the corporate income tax in the form of footnote 200, which spans more than a page in tiny but useful print. It summarizes the main points regarding why corporate tax is necessary as a backstop to individual income taxation, citing to the main arguments for and against, thus serving as a valuable micro treatise on the subject.
Finally, I note that FP&S only give the FTC two cheers instead of three because they feel that it conflicts with the principle of ability to pay, an argument I have not seen before and that gives me pause. Their argument is that foreign taxes are a cost to individuals attendant to investing abroad, and that crediting these taxes is too generous from the perspective of fairness, that a deduction would sufficiently account for the cost in terms of measuring ability to pay. I can understand that argument where the FTC is itself too generous, allowing cross-crediting and not restricting its application to double taxation. But I do not understand that argument applied to an FTC that restricts itself to a dollar for dollar credit of actual taxes paid, which I believe is the argument being advanced here. That's something to think about a little more.
In any event, abstract below and paper at the link above. Well worth a read.
Reform of the U.S. international income taxation system has been a hotly debated topic for many years. The principal competing alternatives are a territorial or exemption system and a worldwide system. For reasons summarized in this Article, we favor worldwide taxation if it is real worldwide taxation; that is, a nondeferred U.S. tax is imposed on all foreign income of U.S. residents at the time the income is earned. However, this approach is not acceptable unless the resulting double taxation is alleviated. The longstanding U.S. approach for handling the international double taxation problem is a foreign tax credit limited to the U.S. levy on the taxpayer’s foreign income. Indeed, the foreign tax credit is an essential element of the case for worldwide taxation. Moreover, territorial systems often apply worldwide taxation with a foreign tax credit to all income of resident individuals as well as the passive income and tax haven income of resident corporations. Thus, the foreign tax credit also is an important feature of many territorial systems. The foreign tax credit has been subjected to sharp criticisms though, and Professor Daniel Shaviro has recently proposed replacing the credit with a combination of a deduction for foreign taxes and a reduced U.S. tax rate on foreign income.
In this Article, we respond to the criticisms and argue that the foreign tax credit is a robust and effective device. Furthermore, we respectfully explain why Professor Shaviro’s proposal is not an adequate substitute. We also explore an overlooked aspect of the foreign tax credit—its role as an allocator of the international tax base between residence and source countries—and we explain the credit’s effectiveness in carrying out this role. Nevertheless, we point out that the credit merits only two cheers because it goes beyond the requirements of the ability-to-pay principle that underlies use of an income base for imposing tax (instead of a consumption base). Ultimately, the credit is the preferred approach for mitigating international double taxation of income.
This paper introduces a new dataset that codes the content of 519 tax treaties signed by low- and lower-middle-income countries in Africa and Asia. Often called Double Taxation Agreements, bilateral tax treaties divide up the right to tax cross-border economic activity between their two signatories. When one of the signatories is a developing country that is predominantly a recipient of foreign investment, the effect of the tax treaty is to impose constraints on its ability to tax inward investors, ostensibly to encourage more investment.
The merits of tax treaties for developing countries have been challenged in critical legal literature for decades, and studies of whether or not they attract new investment into developing countries give contradictory and inconclusive results. These studies have rarely disaggregated the elements of tax treaties to determine which may be most pertinent to any investment-promoting effect. Meanwhile, as developing countries continue to negotiate, renegotiate, review and terminate tax treaties, comparative data on negotiating histories and outcomes is not easily obtained.
The new dataset fills both these gaps. Using it, this paper demonstrates how tax treaties are changing over time. The restrictions they impose on the rate of withholding tax developing countries can levy on cross-border payments have intensified since 1970. In contrast, the permanent establishment threshold, which specifies when a foreign company’s profits become taxable in a developing country, has been falling, giving developing countries more opportunity to tax foreign investors. The picture with respect to capital gains tax and other provisions is mixed. As a group, OECD countries appear to be moving towards treaties with developing countries that impose more restrictions on the latter’s taxing rights, while non- OECD countries appear to be allowing developing countries to retain more taxing rights than in the past. These overall trends, however, mask some surprising differences between the positions of individual industrialised and emerging economies. These findings pose more questions than they answer, and it is hoped that this paper and the dataset it accompanies will stimulate new research on tax treaties.Nadia Harrison and Lovisa Moller produced a report based on the dataset, entitled Mistreated: The tax treaties that are depriving the world’s poorest countries of vital revenue. Here is the abstract:
Women and girls in the world’s poorest countries need good schools and hospitals. To pay for this, these countries urgently need more tax revenue. A little-known mechanism by which countries lose corporate tax revenue is a global network of binding tax treaties between countries. This report marks the release of the ActionAid tax treaties dataset – original research that makes these tax deals made with some of the world’s poorest countries easily comparable and open to public scrutiny.
ActionAid also produced an interactive map showing overall treaty effects by country.
Tagged as: scholarship Tax law tax policy treaties
The IRS faces constant funding pressure from Congress, despite becoming a victim of constant mission creep thanks to Congressional mandates (ACA and FATCA in particular). Over the years many have pled with Congress to stop underfunding the agency. The latest comes from seven former commissioners, who note that not least among the reasons to fund the IRS is the need to spend money on cyber security as the IRS fends off one million hacking attempts each week.
That's a lot of hacking because of course the payload is enormous. FATCA has surely expanded the payload significantly by developing an enormous database of personal information attached to bank account numbers and detailed account activity on a global scale. Even a small breach of security with respect to that vault will be disastrous for the taxpayers involved.
The commissioners also suggest that the IRS workload is going to increase due to BEPS. BEPS is expected to result in more treaty-based conflicts among jurisdictions, so I expect more competent authority hours will be needed. But it's likely also the case that country-by-country reporting requirements will add another enormous treasure trove of information to the database, further increasing the payload.
At minimum, Congress has simply got to fund security for this massively expanding taxpayer information database.
November 9, 2015The Honorable Thad CochranChairmanCommittee on AppropriationsUnited States Senate113 Dirksen Senate Office BuildingWashington, D.C. 20510The Honorable Harold RogersChairmanU.S. House Committee on AppropriationsU.S. House of Representatives2406 Rayburn House Office BuildingWashington D.C. 20515The Honorable Barbara A. MikulskiVice ChairwomanCommittee on AppropriationsUnited States Senate503 Hart Senate Office BuildingWashington, D.C. 20510The Honorable Nita M. LoweyRanking MemberU.S. House Committee on AppropriationsU.S. House of Representatives2365 Rayburn House Office BuildingWashington, D.C. 20515
Subject: IRS Appropriations for Fiscal Year 2016
Dear Chairman Cochran, Vice Chairwoman Mikulski, Chairman Rogers and Ranking Member Lowey:
We are all former Commissioners of the Internal Revenue Service. Over the last fifty years we served during the administrations of Presidents John F. Kennedy, Lyndon B. Johnson, Ronald Reagan, George H.W. Bush, William J. Clinton, and George W. Bush.We are writing to express our great concern about the proposed reductions by the House and Senate in appropriations for the Internal Revenue Service for the current fiscal year that will end on September 30, 2016. We understand that the Appropriations Committees in the House and Senate have proposed to reduce the FY 2015 IRS appropriation of $10.9 billion by $838 million and $470 million, respectively, for the current fiscal year. If Congress were to reduce the IRS appropriation for the current year, it would represent yet another reduction in the IRS appropriation. The appropriations reductions for the IRS over the last five years total $1.2 billion, more than a 17% cut from the IRS appropriation for 2010. None of us ever experienced, nor are we aware of, any IRS appropriations reductions of this magnitude over such a prolonged period of time. The impact on the IRS of these reductions is that the IRS has lost approximately 15,000 full-time employees through attrition over the last five years, with more losses likely in the current fiscal year unless Congress reverses the funding trend. These staffing reductions come at a time when the IRS workforce is aging, with nearly 52% of IRS employees now over the age of 50 and 24% already eligible to retire. Three years from now, 38% of IRS employees will be eligible to retire. This loss of IRS knowledge and experience is alarming, particularly in light of the fact that, out of a present workforce of about 85,000 employees, the IRS has only about 3,400 employees under the age of 30 and only 384 employees under the age of 25 due to hiring freezes for budgetary reasons at the IRS since 2010 and periodically from 2005 to 2010. Over the last fifty years, none of us has ever witnessed anything like what has happened to the IRS appropriations over the last five years and the impact these appropriations reductions are having on our tax system.These reductions in IRS appropriations are difficult to understand in light of the fact that, at the same time these reductions have occurred, the Congress repeatedly has passed major tax legislation to substantially increase the IRS workload. Most recently the Congress passed the Foreign Account Tax Compliance Act and the Patient Protection and Affordable Care Act, two major new programs, each of which significantly expands the IRS' tax administration burdens. The IRS personnel reductions come at a time when the IRS is stretched to the breaking point to cope with tax enforcement challenges attributable to global and domestic changes that are impacting our tax system. Increasingly, the United States is facing tax challenges as the result of efforts that are taking place in the international tax arena to deal with the tax non-compliance that is accompanying the continued globalization of business and investment activities. The most recent tax changes to address international tax non-compliance are proposed in the Organization for Economic Cooperation and Development's (OECD) Base Erosion and Profit Shifting Report. Regardless of one's view of these proposed changes, it is clear that the IRS will be substantially impacted by changes and challenges of other countries who adopt them.Additionally, increasing incidents of identity theft and refund fraud are being perpetrated against our tax system by large, sophisticated organized crime syndicates around the world. These criminals seek to file false returns and claim fraudulent refunds using personal taxpayer data obtained from sources outside the IRS. At the same time, many unlicensed, unregulated return preparers are preparing and filing fraudulent tax refund returns. Every time there is an information technology hacking event in the public or private sectors in which Social Security numbers are stolen, the likelihood exists for additional identity theft and refund fraud. The growing refund fraud challenge to our tax system is especially alarming to us because of the need, which is fundamental to our tax system, for the IRS to be able to assure taxpayers who are paying their fair share of taxes that other taxpayers are doing the same thing. To emphasize the seriousness of refund fraud, the Government Accountability Office earlier this year placed identity theft and refund fraud on its list of "high risk areas" in the federal government, a sure sign to each of us that the IRS should have more, not fewer, enforcement resources to deal with this threat to the integrity of our tax system,To place the impact on our tax system of the Congressional IRS appropriations reductions over the last five years in its proper context, Congress almost annually over the last 25 years has passed legislation that has imposed additional burdens on IRS tax collection and administration under our revenue laws. During this time, the Congress also repeatedly added more and more socio-economic incentives to the tax code and called upon the IRS to administer these new socio-economic programs, including healthcare, retirement, social welfare, education, energy, housing, and economic stimulus programs, none of which is related to the principal job of the IRS to collect revenue. At the same time, Congress passed even more legislation to pay for these tax spending programs. The result is that almost 30 years after the 1986 Tax Reform Act, our tax laws are a mess. Our tax laws have become so difficult for taxpayers to understand that 80% of all individual taxpayers now use paid consultants or software to prepare their income tax returns. Because of insufficient IRS resources in FY 2015, an average of more than 60 percent of the taxpayers who called the IRS for assistance in preparing their returns during the last filing season were unable to reach an IRS assistor, even after many taxpayers had remained on the telephone for more than 30 minutes before they were automatically cut off because of the volume of calls, which the reduced numbers of IRS assistors were unable to handle. Equally serious are the cybersecurity threats illustrated by the problem that occurred earlier this year involving unauthorized attempts to access taxpayer information using the IRS' Get Transcript online application. Separately, the IRS continues to experience about one million attempts each week to hack into its main information technology systems. Although the IRS has so far successfully thwarted these attacks and its main systems remain secure, all of this astonishes us and emphasizes to each of us that the IRS taxpayer assistance and IRS information technology resources are severely underfunded, especially when compared to the increasing cybersecurity budgets of private sector companies.It is clear to each of us that the IRS appropriations reductions over the last five years materially and adversely affect the ability of the IRS to assist taxpayers who are trying to comply with their tax obligations, as well as the ability of the IRS to detect and deter taxpayers who have not complied with their tax obligations. Recently, we understand that the IRS estimated a direct annual revenue loss to the Federal government in tax enforcement at $6 billion last year and $8 billion this year, due to such appropriations reductions. Historically, for every dollar invested in IRS tax enforcement, the United States received $4 or more in return, and we understand that continues to be true today.The Congressional Budget Office in its June 2015 Long-Term Budget Outlook projected future fiscal challenges to the United States because of the large and increasing size of our national debt and rising future operating deficits attributable to an aging U.S. population and rising healthcare costs. It, therefore, is imperative that our tax system in the future operate at an optimal level in order to maximize the revenues the IRS collects. For that to happen, the IRS must be able to assist taxpayers who are trying to comply with their tax obligations, and at the same time be able to enforce the tax laws against those taxpayers who have not complied with their tax obligations. In short, because of our country's fiscal and other challenges, our tax system must work and work well to collect the taxes that are owed.Some have argued that the IRS can solve these problems by simply becoming more efficient. This argument ignores the reality that the IRS is already, by far, the most efficient tax collection agency among large countries in the world. The OECD recently released its bi-annual analysis of tax administration across the developed world and reported, based on 2013 statistics which don't reflect the most recent IRS budget cuts, that the amount the IRS spends to collect a dollar in taxes is approximately half the average amount spent by all OECD countries. Germany, France, England, Canada and Australia all spend as much as two to three times the amount the IRS does to collect a dollar of revenue.In light of the foregoing, we fail to understand how it makes any logical sense to continue to reduce, rather than increase, the IRS budget for FY 2016 in order to optimize the IRS' ability to provide taxpayer service and to enforce the tax laws to increase revenue collections. To put it succinctly, we do not understand why anyone with present and projected debts and annual losses as large as those of the United States would refuse to pay for telephone assistance to people trying to fulfill their tax obligations, would turn their back on $8 billion annually in additional revenue, or would fail to make an investment that offers a return equal to at least four times the amount invested. For these reasons, we respectfully call upon each of you to support and work to accomplish the passage of an IRS appropriations request for FY 2016 that is substantially in excess of the appropriation for the IRS in FY 2015.Mortimer M. Caplin (1961-64)Sheldon S. Cohen (1965-69)Lawrence B. Gibbs (1986-89)Fred T. Goldberg, Jr. (1989-92)Shirley D. Peterson (1992-93)Margaret M. Richardson (1993-97)Charles O. Rossotti (1997-2002)
Tagged as: FATCA governance information institutions IRS US
Economist Youssef C. Benzarti has recently posted an article on SSRN, How Taxing is Tax Filing? Leaving Money on the Table Because of Compliance Costs, in which he that "taxpayers forego $800 on average to avoid the cost of itemizing."
Can this really be true? It is hard to imagine given that for resident filers, at least, plenty of cheap tax help is available all around, and itemizing is merely a question of gathering receipts and punching in numbers (If the sample includes a lot of US persons permanently living abroad who don't understand their US tax filing obligations, I could understand the choice to bear higher taxes out of a fear of getting things wrong). It's not like most people are sitting around their kitchen tables calculating things out themselves; but even if they are, it's not really THAT hard, is it? In any event, here is the abstract, worth a closer read. If the analysis is correct, it bolsters the case for worrying about complexity as a second level of tax that is allocated without regard for ability to pay.
I use a quasi-experimental design to estimate the burden of complying with the tax code. Employing a sample of US income tax returns, I observe the preferences of taxpayers over itemizing deductions or claiming the standard deduction. Treated taxpayers forego $800 on average to avoid the cost of itemizing. A revealed preference argument implies that itemizing deductions is as painful as working more than 17 hours at one’s regular job. The amount of foregone benefits is larger for richer households, consistent with the fact that the value of time increases with income. I explore two explanations of the magnitude of the estimates. First, it could be due to an extreme aversion to filing taxes. Such aversion implies that itemizing deductions imposes an aggregate compliance cost of 0.24% of GDP and an extrapolation to filing federal taxes implies that the overall cost of compliance is 1.55% of GDP. Second, if taxpayers are time-inconsistent the revealed preference argument fails, introducing a wedge between foregone benefits and compliance costs. Being present-biased leads taxpayers to forego large benefits even when compliance costs are relatively small. I provide evidence of taxpayers being present-biased. Both explanations - whether driven by preferences or mistakes - suggest that the burden imposed on society by tax compliance is significantly larger than previously estimated. I discuss policy implications of the result.
Tagged as: compliance economics scholarship Tax law tax policy
Bryan Skarlatos recently testified to the House Ways & Means Committee about the IRS's "Super creditor" status via its federal tax lien power. Given the global nature of the US tax jurisdiction over nonresidents with US person status, the powers of the IRS to seize assets in satisfaction of tax debts is of increasing interest. I think this power is very likely to be ill-understood by those outside the United States. Looking ahead at life under FATCA, consider that soon the IRS will have the information to start assessing tax debts on its global diaspora, and then we will see what happens.
WRITTEN TESTIMONY OF BRYAN C. SKARLATOS, ESQ.
The Internal Revenue Service (the “Service”) is a “Super Creditor” because Congress has given it powers to collect money and property that far exceed those of any ordinary creditor. Typically, a creditor who is owed money cannot just take property of the debtor. Instead, the creditor must first bring a lawsuit, obtain a judgment, and then invoke the power of the court to execute on the judgment by seizing the debtor’s property, usually with the help of a court order or a public servant such as a marshal. In contrast, when taxes are assessed, the Internal Revenue Code automatically creates a lien in favor of the Service in a taxpayer’s property. Then, the Service has the unique and powerful ability to levy on or seize property that is subject to a federal tax lien. In addition, the Service can sue in federal court to collect taxes.
The first step in the tax collection process is the assessment. In general, the Service cannot attempt to collect from a taxpayer until a tax has been assessed.
The Internal Revenue Code gives the Secretary of the Treasure the authority to assess tax. A tax is assessed when it is recorded as a liability, or account receivable, on the Service’s records.
Once a tax has been assessed, the Service is required to notify the taxpayer that the tax has been assessed and to demand payment of the tax. The notice and demand for payment must be made within sixty days of the assessment. The notice and demand must be left at the taxpayer’s home or place of business, or sent to the taxpayer’s last known residence. Failure to pay an assessed tax after notice and demand for payment has been made gives rise to a federal tax lien and the Service’s ability to collect through levy or seizure of property.
Federal Tax Lien
If any person liable to pay a tax fails to pay after notice and demand, the amount not paid, including interest and penalties, becomes a lien in favor of the United States upon all property and rights to property belonging to such person. The tax lien is the mechanism that gives the Service rights to the taxpayer’s property. However, the lien itself does not transfer any value to the Service. As discussed below, a levy is the tool used to transfer the actual property to the possession of the Service.
A federal tax lien arises against any person liable for the tax and attaches to any interest in property that the person may have. A tax lien also attaches to any property the taxpayer may acquire in the future. This is another way of saying that the tax lien attaches to after acquired property.
The law of each individual state determines whether and when a taxpayer has an interest in some type of property. Federal law determines the extent to which the federal tax lien attaches to that interest. For example, the tax lien attaches to a taxpayer’s interest in a joint bank account to the extent that the taxpayer can withdraw money from the account. Similarly, if under state law, one spouse has a right to community property, then the tax lien attaches to that spouse’s interest in community property. Or, if one spouse has an interest in property held as tenants by the entirety, then the federal tax lien can attach to that interest. A federal tax lien attaches to interests in personal or real property, bank accounts, retirement accounts, Social security benefits, alimony (but not child support) payments, beneficial interests in trusts, contingent interests, future interests, and intangibles such as accounts receivable, trademarks, licenses, royalties and franchise rights.
The federal tax lien relates back to the date of assessment. However, a federal tax lien does not have priority over purchasers for value, holders of security interests, mechanics lienors or judgment creditors until a Notice of Federal Tax Lien (a “Notice of Lien”) is filed. The Service may file a Notice of Lien to obtain priority over these holders of interests through the general rule of “first in time, first in right.” The interest that is perfected first has priority if and when the property rights are sold or seized.
State law determines where a Notice of Lien must be filed to be effective. Generally, Notices of Lien are filed with clerk of the court in the county where real property is located, with the clerk of the court in the county where the taxpayer is located in the case of personal property, or with the clerk of the federal district court in the district where the real property or taxpayer is located. Filing the Notice of Lien provides constructive notice to anyone else who may hold or acquire an interest in property and gives rise to the “first in time, first in right” rule.
The Notice of Lien is merely a device that provides deemed notice to other interested parties for purposes of establishing priority. The federal tax lien exists independently from the Notice of Lien and there is no requirement that the Service even file the Notice of Lien. However, if the Service does file a Notice of Lien, it must give the taxpayer written notice that the Notice of Lien is being filed with five days of the filing and give the taxpayer an opportunity to request a Collection Due Process hearing (a “CDP Hearing”) to contest the filing of the Notice of Lien. Requesting a CDP Hearing does not stop the filing of the Notice of Lien; it just gives the taxpayer a forum to request that the lien be lifted.
Once a federal tax lien arises, it generally is valid until the taxpayer’s liability is satisfied or until the time for enforcing the lien expires. Generally, an assessment may be collected by levy or court proceeding within ten years after the date of assessment. The ten-year period can be extended under limited circumstances.The filing of a Notice of Lien, by necessity, is open to the public and can harm a taxpayer’s credit standing and can affect business relationships by, for example, triggering a default under certain credit agreements, etc.
Levy and Seizure
If any person liable to pay a tax fails to do so within ten days after notice and demand, then the Service may collect the tax by levying on all property owned by that taxpayer, or on which there is a federal tax lien for the payment of such tax. Levies and seizures are ways in which the Service takes possession of property or rights to property. Levies and seizures are essentially the same thing. The term “levy” is typically used when the Service takes possession of intangible property or rights to property and the term “seizure” is typically used when the Service takes possession of real or personal property. A levy or seizure is a provisional collection device, meaning that disputes over ownership, priority or even liability for the tax can still be disputed after the levy or seizure.
Two notices must be issued before the Service can execute a valid levy or seizure. First, the Service may not attempt any collection until ten days after a notice and demand for payment of the tax. This notice and demand can be the same notice and demand that must be made within sixty days after the assessment as described above. Typically, the Service sends two or three notices and demands for payment of taxes before it proceeds with the levy process.
Second, the Service must notify the taxpayer in writing of its intention to levy on the taxpayer’s property or rights to property at least 30 days before the date of the levy (the “Notice of Intent to Levy”). The Notice of Intent to Levy must be given either in person, left at the taxpayer’s dwelling or usual place of business, or sent by certified or registered mail, return receipt requested, to the taxpayer’s last known address.Like the Notice of Tax Lien, the Notice of Intent to Levy must inform the taxpayer of the right to request a CDP Hearing within 30 days of the Notice of Intent to Levy. At the CDP Hearing, the taxpayer can challenge the appropriateness of the collection activity and, in some cases, the validity of the underlying tax liability. If the taxpayer timely requests a CDP Hearing, the Service may not proceed with levy until the CDP Hearing is complete.
The Service can use a levy to take any property subject to the federal tax lien. This includes just about any kind of property in the possession of the taxpayer or property in the hands of a third party to which the taxpayer is entitled. The Service can levy property from a third party simply by serving the levy on that third party. No special notice or procedure is required to levy property from a third party.
Typically, a levy only reaches property in possession or rights in existence as of the date the levy is issued. Unlike a federal tax lien which attaches to after-acquired property, most levies do not reach after acquired property. Thus, a levy served on a bank will reach the balance in the account on the day of the levy and does not reach a deposit made the day after the levy. However, there is an exception to this rule. A continuing levy can be issued on salary and wages. A continuing levy is like a vacuum cleaner that continues to sweep up money as it is paid to the taxpayer.
There are very few types of property that are exempt from a levy. State laws that provide homestead exemptions, protect certain types of retirement accounts, or limit the amount of a person’s salary that can be garnished, do not trump the federal levy laws and are ineffective against the Service’s power to levy. Federal law provides limited exemptions for things like school books, tools of trade, wearing apparel, fuel, provisions, furniture and personal effects, unemployment or workers compensation benefits and a minimum amount of wages.As noted above, the Service typically has ten years from the date of assessment to collect a tax by levy.
In addition to the administrative lien and levy procedures described above, the Service can also request the Tax Division of the Department of Justice to sue a taxpayer in federal court to collect a federal tax liability. Federal courts have subject matter jurisdiction over suits to obtain judgments pursuant to the Internal Revenue Laws. While an assessment and lien are not necessary prerequisites for such suits, there usually is an assessment and related federal tax lien. The Service sometimes uses the judicial remedy to reduce a federal tax lien to judgment when the statue of limitations for collecting administratively by levy is about to expire. If the Service obtains a judgment against the taxpayer, a whole new statute of limitations for collection on the judgment begins to run.
The Service also uses judicial remedies to sue third parties who have failed to turn over property in response to a levy, to establish liability against a transferee of property, or to recover a refund of taxes that was mistakenly paid to a taxpayer.
There are many ways that a taxpayer can defend against the collection of taxes. The CDP Hearing requests referred to above are some of the most powerful tools that a taxpayer can use because, while a CDP Hearing request does not stop the filing of a Notice of Lien, it can stop a levy pending the outcome of the CDP Hearing. Of course, if the Service collects money or property improperly, the taxpayer can sue for a refund.
Tagged as: FATCA IRS jurisdiction tax policy u.s.
I don't want to spend too much time analyzing what is, in the main, a plea for Congress to give the IRS more money, and secondarily some cheerleading for the hard work put in by the IRS and the financial industry to get FATCA operational. Still, it is worth noting that there is much unstated here, for instance: what is meant by "home" jurisdiction--a question no one seems too keen to ask or answer even as we rush headlong into global automatic information exchange. If we actually care about getting these things right we have got to have a global conversation about who owes what to whom as a matter of justice and as a matter of rights, and most importantly: who is going to make those decisions.
When we don't have those conversations it is all too easy for someone to wax enthusiastically about the project of demanding the bank account numbers and balances of millions of people who don't reside in their country while in the next breath advising caution and restraint when it comes to other countries taxing "their" corporations.
Thank you to the U. S. Council for inviting me to be here today. I’m honored to have the opportunity to participate in this important discussion about international tax issues.
Although I have been IRS Commissioner for only a few months, I have quickly come to appreciate the great importance of focusing on the international tax compliance of both business and individual taxpayers. And I’ve come to understand that it is not possible to overstate the challenge that globalization poses to tax administration for the United States and I’m sure for many other jurisdictions as well. Rapid and extensive globalization of markets, business models, and financial systems has presented taxpayers and tax administrations with challenges and opportunities of all sorts.
As you know, the United States government is attempting to respond to the global challenges -- sometimes aggressively and sometimes cautiously and collaboratively, but hopefully always with thoughtfulness, perspective, and a sense of global responsibility. It seems we are in a critical time in these respects, as all of you know well, and this makes it a very exciting time for global tax administration, a time in which rapid and dramatic changes are afoot. For example, it was only a few years ago that tax administration officials were talking about the need to pierce the veil of bank secrecy, and today it seems that veil is being shredded as we move toward a cooperative environment based on tax transparency.
One of the most exciting aspects of our current times is to see governments working so closely together to ensure that taxpayers comply with the tax obligations of their home jurisdictions. With respect to individual tax compliance, we see this collaboration in the process by which FATCA will soon go into effect, and its younger but already bigger sister, the Common Reporting Standard, or CRS, will soon be adopted globally. The cornerstone of these efforts, of course, is the automatic, multilateral exchange of information, which signals quite clearly that international tax transparency is no longer a distant hope, but rather an immediate reality.
But as far as we have come on this road, there is still a great deal of work to be done. Although the policy issue has been settled and tax transparency is the common goal, tax administrators still must answer the question of how we make automatic information sharing work well as a practical matter. We must devise brand new systems, processes, and protocols that maximize efficiencies, minimize burden on taxpayers and financial intermediaries, and ensure the safety and security of the information being transmitted. But before talking about these, I would like to step back for a moment and look at where the U.S. is today on offshore tax compliance and how we got to this point.
The IRS’ serious efforts to combat offshore tax evasion, which had long been a problem, began in 2008 with our efforts to address specific situations brought to our attention in part by whistleblowers. The most notable example of this was the situation with UBS. The IRS realized that the globalization of investment opportunities, and the marketing of those opportunities, could do serious harm to the integrity of the U.S. tax system if complete tax transparency was not part of the equation. This is especially true because our tax system is built on the notion of voluntary compliance. Allowing wealthy individuals to use overseas accounts without paying taxes not only erodes the home jurisdiction’s tax base, but it also is an affront to the vast majority of taxpayers who play by the rules and expect their neighbors to be doing likewise. So from the outset, the IRS adopted a clear message: International tax evasion was, and would continue to be, a top priority for the agency, and people hiding assets offshore would find themselves increasingly at risk of enforcement actions.
A turning point in our enforcement efforts came in 2009 with the agreement reached with UBS. This agreement represented a major step toward global tax transparency and helped build a foundation for our future enforcement efforts. Importantly, the agreement sent the message that the IRS would pursue tax evasion around the world, wherever it might be based, and would also focus on those facilitating tax evasion practices. The agreement also showed the IRS’ keen interest in working cooperatively with other governments to obtain the information needed to bring evaders to justice.
Since 2009, the IRS has taken a multifaceted approach to the offshore noncompliance problem. This has included working diligently and cooperatively with other governments to obtain information on U.S. owners of offshore accounts, as well as banks and other promoters of tax evasive techniques, and using that information to prosecute those willfully evading the law. We have mined the information we’ve obtained for future leads, and have shared our findings with other governments to help them enforce their own laws.
While maintaining strong enforcement programs, the IRS has also sought to encourage taxpayers to come into compliance voluntarily. In 2009, the agency first made available a special Offshore Voluntary Disclosure Program, or OVDP. This program has allowed U.S. citizens with undisclosed offshore accounts to voluntarily disclose those accounts, pay a monetary penalty, and avoid criminal prosecution. Because of this program’s success, modified voluntary programs were made available in 2011 and again in 2012. Since 2009, these programs have resulted in more than 43,000 voluntary disclosures from individuals who paid more than $6 billon in back taxes, interest, and penalties, and the numbers continue to rise. In fact, we have noted a significant uptick in participation since the Department of Justice announced its program for Swiss banks last August. So we have clear evidence that our enforcement efforts are working together with our voluntary programs, and we are hopeful that this dynamic will flourish until the offshore problem is stamped out completely.
Now, while the 2012 OVDP and its predecessors have operated successfully, we are currently considering making further program modifications to accomplish even more. We are considering whether our voluntary programs have been too focused on those willfully evading their tax obligations and are not accommodating enough to others who don’t necessarily need protection from criminal prosecution because their compliance failures have been of the non-willful variety. For example, we are well aware that there are many U.S. citizens who have resided abroad for many years, perhaps even the vast majority of their lives. We have been considering whether these individuals should have an opportunity to come into compliance that doesn’t involve the type of penalties that are appropriate for U.S.-resident taxpayers who were willfully hiding their investments overseas. We are also aware that there may be U.S.-resident taxpayers with unreported offshore accounts whose prior non-compliance clearly did not constitute willful tax evasion but who, to date, have not had a clear way of coming into compliance that doesn’t involve the threat of substantial penalties.
We are close to completing our deliberations on these respects and expect that we will soon put forward modifications to the programs currently in place. Our goal is to ensure we have struck the right balance between emphasis on aggressive enforcement and focus on the law-abiding instincts of most U.S. citizens who, given the proper chance, will voluntarily come into compliance and willingly remedy past mistakes. We believe that re-striking this balance between enforcement and voluntary compliance is particularly important at this point in time, given that we are nearing July 1, the effective date of FATCA. We expect we will have much more to say on these program enhancements in the very near future. So stay tuned.
Now, I’ve mentioned FATCA a couple of times and let me talk about it more directly. With FATCA, Congress took a significant stride towards global tax transparency by calling for automatic information reporting on financial accounts held by U.S. taxpayers, no matter where those accounts are located. And so, as everyone knows, FATCA’s enactment has had a dramatic impact on the global financial system, as financial intermediaries all around the world have had to modify their systems and processes to carry out what FATCA calls for. We know that this implementation has been difficult and costly, to say the least, and I’d like to thank the financial community for working so closely with us to ensure that, in the future, all international investors are also tax-compliant investors. In a truly global economy, this is fundamental, of course, and I believe at some point in the future all of us, in both the private and public sectors, will look back with not only a strong sense of accomplishment, but also with wonder at how it ever could have been otherwise.
I’ll also note that the U.S. government’s preparations for FATCA have not exactly been easy. Since enactment, the IRS and Treasury have been working extremely hard to solidify the legal framework, global relationships, and infrastructure necessary to convert FATCA from a concept into a practical reality, and this has been no small task. For four years now, FATCA implementation has demanded a tremendous amount of hard work and dedication on the part of a relatively small group of public servants, without whom offshore tax evasion might still be considered a viable practice. These folks have diligently worked on issuing guidance that is clear and eases the FATCA compliance burden as much as possible, and they have made a herculean effort to take into account the extensive stakeholder comments we’ve received in order to get there. I know there are still a few more things to do, but I should take the time, midstream, to thank the IRS and Treasury FATCA team for the work they have completed so far, because that work has been monumental.
And beyond the legal and regulatory framework that’s been created, you’ll find a number of other very novel elements of the FATCA implementation effort that are important in their own right.
First, so that we can identify and interact with our stakeholders in the global financial community, we had to create a new Global Intermediary Identification Number, or GIIN, and develop a unique registration system. This system allows financial intermediaries around the world to establish their FATCA-compliant status and obtain a GIIN to prevent FATCA withholding when receiving payments from U.S. sources. The FATCA registration system opened several months ahead of schedule and has performed flawlessly to date. So far, tens of thousands of financial institutions have established FATCA accounts and received their GIINs. And just yesterday in fact, we successfully made available to all potential withholding agents the so-called “IRS FFI List” of Foreign Financial Institutions, so those agents can download the database of IRS-issued GIINs to their own systems and use that data to determine which of their account holders are FATCA-compliant and thus free from FATCA withholding.
Second, we had to be very mindful that FATCA data will be coming to us from a wide variety of sources and in a variety of ways. So we had to reach intergovernmental consensus, with extensive input from the financial sector, on a common data format, or schema, that will allow us to process and interpret all FATCA data, no matter its source, once we receive it. This hard work was guided by the OECD, and for that effort that I would like to extend my special thanks to the OECD representatives here in the room today, as well as to the individual members of the OECD Secretariat staff and the private sector financial community not with us who diligently worked through a tremendous amount of detail to ensure that FATCA information reports can be used efficiently and effectively, not only by the IRS but by our reciprocal FATCA partners as well.
Third, the automatic exchange of bulk information contemplated by FATCA will require a modern mode of data transmission, one that, frankly, is not available at the moment. This too has presented a challenge for IRS like no other faced in the past. So, working again with our partners in tax administration around the world, we have had to design a new system for electronic data exchange that will allow FATCA data to be transmitted quickly and securely. So far, we are pleased with the resulting design of this new “International Data Exchange System,” which we refer to as IDES. We believe it will accomplish our goals, and anticipate it will be available to users by January of the coming year so that FATCA data can flow on time.
In this regard, I also want to emphasize that we take very seriously the need to ensure that the financial data transmitted through IDES will be transmitted securely, kept confidential, and used only for tax purposes. Protecting this information and assuring its intended use must be our number-one goal. Toward that end, we designed IDES to include state-of-the-art encryption protocols, and we developed a set of safeguard standards addressing the security and use of data once it is received by a government.
Lastly and importantly, during the past several months, we have been conducting bilateral meetings with each one of our reciprocal FATCA partners to ensure that our safeguard needs are understood and that we and our partners achieve a high level of comfort that FATCA data will be kept confidential and used only for tax purposes, as our treaty and information exchange agreements contemplate.
Before I leave the subject of FATCA implementation, I want to mention our resource limitations at the IRS. The agency continues to be in a very difficult budget environment. Since Fiscal Year 2010, IRS funding has been reduced by more than $850 million, or about 7 percent, and we have 10,000 fewer employees, even as our responsibilities have continued to expand. In the absence of additional resources, our ongoing funding shortfall has major, negative implications for the agency’s ability to continue to adequately fulfill its dual mission of excellent taxpayer service and robust tax compliance programs.
Having said that, it is also important to point out that Congress has mandated that the IRS implement FATCA. Whatever else we are going to do, the IRS must move forward with our non- discretionary legislative mandates, and FATCA is at the top of that list. So I want to assure those of you dealing with FATCA implementation in other ways and in other realms that the IRS will continue to find the necessary resources for FATCA, and implementation will not be disrupted by our budget constraints.
Let me also offer a few words on FATCA enforcement. First, as I have already said, we realize that FATCA implementation is challenging not only for the IRS, but also for the financial institutions that are covered by it. We understand there is a great deal of complexity in FATCA, and that financial institutions must make substantial modifications to their processes and systems to implement it. And we understand that complying with the letter of these requirements, down to the final dotting of “I”s and crossing of “T”s, will take some time. As we announced publicly in an IRS Notice last month, we intend to view 2014 and 2015 as a so-called “transitional” enforcement period during which we will take into account a financial institution’s good-faith efforts to comply in our evaluation of what constitutes acceptable FATCA compliance.
Second, we’re well aware that our offshore enforcement resources going forward will need to be dedicated not to small-scale issues that those trying to be FATCA compliant may have, but rather to broader-scale problems presented by those who choose to seek new ways to evade their tax obligations. That is, we recognize that compliance with FATCA by those trying to comply, and with the new Common Reporting Standard when it goes into effect, will improve and be fine- tuned over time. Problems in this area will be corrected by the compliance-minded. The IRS and other enforcement agencies around the world will be able to focus on the structures and arrangements that, unfortunately but inevitably, will be devised to stay in the shadows in a new world of tax transparency. And in that new world, governments will need to work closely together to shine light into those shadowy spaces until they no longer exist.
Now, although I’m suggesting here that FATCA will not put a complete end to the offshore problem we face, I am telling a very positive story, not a bleak one. FATCA and CRS clearly will make it much more difficult and costly to hide assets, so that those who still seek to do so will be forced to spend money to devise more complex structures, turn to riskier jurisdictions and riskier forms of investment, and face far greater certainty of prosecution when found. FATCA will also de-stigmatize those holding offshore accounts for legitimate purposes, as those accounts will be both reported and reported upon in the normal course, while tax administrations focus their enforcement efforts against those truly seeking to evade taxation.
Interestingly, we can already begin predicting that governments will be working on these future problems completely in concert. In fact, because our interests are aligned and the new instruments of transparency and enforcement we are developing together will be shared, I believe the melody of our total success will be sweet and come quickly.
Now, before I conclude, I would like to say a few words about the topic that is front and center at this conference – that is, Base Erosion and Profit Shifting, or BEPS.
For some time now, the IRS and the U.S. Treasury have been active participants in the OECD’s project to address BEPS on a global scale. We fully support the goal of developing a coordinated and comprehensive action plan to update our international tax rules to reflect modern business practices. Hopefully, this coordinated work will help prevent, rather than exacerbate, the double taxation disputes that could arise if countries unilaterally attempt to address these issues without consensus-based principles. And of course, consensus-based principles are also critically important to ensuring that businesses have the tax certainty they need to operate efficiently around the globe.
That said, I have one point that I believe needs to be considered in the context of these important discussions. I urge that your policy and legal determinations not be made without thoroughly considering the practical implications of these decisions, not only for businesses, but for tax administrations. Let me provide just one example to illustrate what I mean.
I understand that among the reforms being considered is a process known as “country-by-country reporting,” under which multinational businesses would be required to provide, to the tax authorities in each country in which they do business, certain financial information, broken down by country (hence the term, “country-by-country reporting”). I also understand that one possibility for disseminating this data is for all the information reports to be provided to the tax administration in the business’s headquarters country and then shared by that tax administration with the other jurisdictions through the vehicle of treaty-based information exchange. Lastly, I’ve heard it is contemplated that these reports would be exchanged for general risk assessment purposes, not for purposes of an existing audit, which is the current, well-established information exchange standard.
So, given all this, let’s assume that the IRS receives 2,000 of these reports from U.S.- headquartered businesses (although the number could easily be much higher than that) and let’s assume that an average of just five other countries ask for each of these 2,000 reports in any given year. This would mean 10,000 new annual requests for exchange of information coming into our competent authority’s office. And this is just the initial requests. If the proposed new risk assessment standard would justify follow-on requests for additional specific or clarifying information to further the risk assessment, the demand could grow even greater on our Exchange of Information program, or EOI, which is the conduit used by foreign governments to request tax information from us.
So, I ask that this type of simple impact be taken into account as you go forward on this issue and the others you are working to address. One possible way to exchange “country-by-country” reports would be to require that they be automatically exchanged electronically, perhaps through the IDES system I mentioned earlier. Automatic exchange would eliminate the need for a person to evaluate whether or not a requesting country really has a legitimate interest in the information for risk assessment purposes. Together with this might be an agreement that there would be no follow-on requests unless an audit is begun. If this type of care were not taken, then tax administrations with a significant number of headquarters companies would have to reallocate our already dwindling resources to our EOI programs so that we can deal with just this one aspect of the BEPS project.
So again, I urge you in your policy discussions to carefully consider the administrative impact of your decisions. In order for your policy goals to be achieved, any new regime needs to be workable not only from the perspective of taxpayers but also from a tax administration standpoint.
Let me close now by saying that the IRS looks forward to working with our tax administration partners around the world as we move together toward greater tax transparency and greater coordinated efforts to address common compliance challenges. Thank you for letting me spend this time with you today, and I would be happy to take your questions.
Tagged as: FATCA rule of law social contract Tax law tax policy u.s.
Advocates of tax policy reform use common rhetorical themes to link their preferred policies to desired descriptors. The most common of these are fairness, efficiency, simplification, and
competitiveness. Most of the time these terms are used without definition or explanation and they are used indiscriminately to support policy proposals across the political spectrum. This can have a tremendously destructive impact on public discourse over time, as people use these words to mean virtually anything, and then begin to believe these words have no meaning at all.
In his 1946 essay, Politics and the English language, on using "language as an instrument for expressing and not for concealing or preventing thought," George Orwell warned that using rhetoric in this sloppy manner ultimately destroys our ability to engage in critical thinking:
[A]n effect can become a cause, reinforcing the original cause and producing the same effect in an intensified form, and so on indefinitely. A man may take to drink because he feels himself to be a failure, and then fail all the more completely because he drinks. It is rather the same thing that is happening to the English language. It becomes ugly and inaccurate because our thoughts are foolish, but the slovenliness of our language makes it easier for us to have foolish thoughts.Orwell argued that political actors use language to deceive their audiences. He writes:
The words democracy, socialism, freedom, patriotic, realistic, justice have each of them several different meanings which cannot be reconciled with one another. In the case of a word like democracy, not only is there no agreed definition, but the attempt to make one is resisted from all sides. It is almost universally felt that when we call a country democratic we are praising it: consequently the defenders of every kind of regime claim that it is a democracy, and fear that they might have to stop using that word if it were tied down to any one meaning.Political actors can easily exploit the different meanings of words by using them in vague and imprecise ways. The audience then assumes the word to mean what they think the word means, rather than whatever meaning might have been intended by the speaker. The popular use of the term "a fair tax regime" serves as a ready example. Each person projects their own, everyday understanding of fair onto this word, giving the phrase any number of meanings, probably few of which would survive scrutiny under close examination. Consequently, a political actor announcing a new tax policy can deceive her audience by calling it “a step towards a fair tax regime” without in any way attempting to define what such a regime might require to fulfill principles of fairness.
In a paper presented last month at McGill, Professor Lynne Latulippe presented the use and misuse of the term "competitiveness" in contemporary tax policy. This term, usually bundled with efficiency, frames contemporary tax policy discussions and often hides the fact that generous benefits are intended to be granted to certain political constituents thereunder.
On Monday, Professor Shirley Tillotson from Dalhousie University will add to this discussion by presenting her text, “The moral worlds of fair taxation: a perspective from 20th century Canadian history” at the McGill Tax Policy Colloquium. In an echo of Orwell's warnings, Professor Tillotson presents a striking example of the use and misuse of rhetoric in furthering political goals by examining the use of "patriotism" in the development of Canadian taxation. Patriotism served as a ‘moral exhortation’ in the interwar period, as Professor Tilloston puts it, to do one’s part for the national purse.
Professor Tillotson employs as a telling example a noted failure of the federal tax authority to enforce compliance with the tax law on judges in Quebec, on the grounds that exposing judges as tax dodgers would undermine “absolute confidence” in the system just as the government badly needed cash to address the fiscal crisis of the 1930s. The rhetoric ran thus: if people do not have confidence that the judiciary is acting patriotically, then why would they aspire to patriotism? By sweeping non-compliance under the rug and linking taxation with war, the authorities were able to convince people in the 1920s through to the 1940s that paying taxes is patriotic.
These days, we tend not to use the term patriotism to convince the public to comply with tax law. Instead, Professor Tillotson argues, discourse in the late 1950s and early 1960s revolved around different questions: which features are of the tax system are fair, economic, or moral? Deductible mortgage interest payments, child care expense deductions, expense account deductions are examples of policies that were in play. All of these succeeded or failed because they were fair or unfair; economic or uneconomic; or moral or immoral.
|Free-riders in action.|
But a definition of free-rider depends on one’s definition of fairness. Multinationals like GE, Starbucks, Google, or Apple were easily painted as free-riders after media reports that they apparently pay very little taxes anywhere. Many people think that the fair share for these multinationals should be higher. Yet each company points to the other ways in which each contributes to social goals, and each lobbies vigorously for ever more tax reductions by arguing that these reductions would help them contribute even more to society or by falling back on a rhetoric of competitiveness.
Consequently, we will continue to "lob moral molotovs" at each other until we come to some definition of fairness. Maybe, as Orwell suggests, we do not want to find a definition for fairness, because then we will be tied to that definition. Self-interested parties want to continue hijacking this word, and others like it, to their own advantage. A consensus on fairness would put an end to that.
Reading Orwell alerts us to how important it is to pay close attention to the words used in tax policy discourse, and parse through any tax talk that is mired in political spin. Orwell warned that the "invasion of one's mind by ready-made phrases … can only be prevented if one is constantly on guard against them, and every such phrase anaesthetizes a portion of one's brain.” As Professor Tillotson puts it: “[w]e should be able to do better”.
Tagged as: scholarship tax policy
Tagged as: scholarship tax policy
Tagged as: 1% austerity budget fairness lobbying political malfunction tax policy u.s.